Lehman collapse costly for Tempe - East Valley Tribune: News

Lehman collapse costly for Tempe

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Posted: Thursday, September 25, 2008 1:19 pm | Updated: 11:29 pm, Fri Oct 7, 2011.

Troubles on Wall Street have come to Mill Avenue.

Tempe stands to lose as much as $3.7 million invested in securities issued by the recently bankrupted financial services firm Lehman Brothers.

According to the city, that loss would represent a small fraction of Tempe's total investment balance in the affected state-run portfolio: $287 million.

The only other East Valley community with money at stake is Queen Creek, which only had $483 invested.

No local school districts are affected because they invest their money through Maricopa County, which did not hold Lehman Brothers as an asset.

State Treasurer Dean Martin said about 140 municipalities, Tempe and Queen Creek included, participate in the state's Local Government Investment Pool, or LGIP. That pool has $12 billion in assets.

However, $39 million was tied up in Lehman Brothers on Sept. 14 - the day the firm filed for Chapter 11 reorganization, the largest in history.

"This is why you diversify," Martin said. "But this is not unexpected, in the middle of a recession, for there to be bankruptcies."

That money now is tied up in bankruptcy proceedings, and to what degree Lehman Brothers creditors get their investments back is up to the court.

Martin, in a letter issued last week, told the investing municipalities an independent credit research firm believes the recovery value for the Lehman debt will be about 60 cents on the dollar.

If that forecast holds, Tempe's loss would be $1.48 million, while Queen Creek would be out $193.

However, there is the chance the bankruptcy court forgives all of Lehman Brothers' debt and the LGIP stakeholders get nothing back. If that happens, Martin said, the pool's yield to investors would drop by 0.1 percent each month for the remainder of the fiscal year.

"They will still make money," Martin said.

During the last fiscal year, the LGIP had a yield of 4.06 percent, Martin said.

Tempe's investment money comes from its usual revenue streams, such as taxes and state aid, said city deputy financial services manager Tom Duensing. And the returns help pay for the city's general operations.

"The idea is not to have idle cash sitting in your bank," Duensing said.

Martin noted the state had been reducing its risk in the LGIP following the credit crunch's start last year.

For example, at one point in the past, the LGIP held $100 million in assets connected to Countrywide Financial, a holding company that mostly dealt with residential mortgages. But by the time Bank of America purchased the troubled firm in January, the pool's exposure was down to $10 million.

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